Wednesday, November 9, 2016

An initial reflection on the election: Charting a way forward on fiscal issues

While we still have the addition of absentee and questioned ballots to go before becoming final, at first glance the state election returns appear to have produced mixed signals from voters on the best way forward on Alaska fiscal policy.

While two incumbents from the House majority lost and two from the Senate who voted in the last session permanently to cut the PFD were returned, others from the House majority who were heavily challenged nevertheless survived.

And most significantly of all, five of the "House Finance six" -- the six members of the House Finance Committee who voted against the Senate's proposed permanent PFD cut -- were reelected, including two (Reps. Pruitt and Wilson) who were directly and heavily targeted by their opponents and PAC's for having voted against the Senate's bill.

While some will question whether there are any clear signals that arise out of those sorts of mixed results, we believe from a fiscal perspective there are at least three significant ones.

The first is that voters support cutting state spending further.  Even the two Senators who voted permanently to cut the PFD last session campaigned heavily on the need for additional budget cuts. So did the heavily challenged, but surviving House majority members.  Those who campaigned on maintaining government spending, particularly the two who challenged the incumbent Senators and some who challenged incumbent members of the House majority, largely lost.

The second is that voters did not ratify making PFD cuts.  While the two Senate incumbents that voted to cut the PFD survived, one did so only after endorsing Senator Dunleavy's proposed PFD Restoration Act, and more importantly as we noted above, so did five of the House Finance six, despite two being directly targeted by their opponents and PAC's for having voted against the Senate's bill.

If there was a broad consensus in favor of cutting the PFD we believe at least one of the targeted House Finance 6 majority members would have been defeated.  This is not to argue that there is a broad consensus in favor of retaining the PFD, but simply that there was no broad consensus either to cut it.

The third is that while there is no broad consensus yet on the overall outline of a fiscal plan (other than generally to make further spending cuts), there is a consensus that there needs to be a "plan."  Clearly, members of the House majority were weakened this election cycle because of the perception that they had not developed a plan to deal with the state's fiscal situation.  Some lost, others had tighter elections than they had before.

But as we note above that does not mean that the voters were enthralled either with the Governor's plan or with the plan subsequently adopted by the Senate, both of which centered around PFD cuts.  The incumbent Senators that voted for it also had tighter than usual races, from opponents that, in view of the other results, weakened themselves significantly by not also emphasizing spending cuts.  And as also noted above, five of the House Finance 6, and both that came under intense fire in the general election, retained their seats even though they voted against the Senate plan.

So where does that leave us as a way forward.  

Frankly, we believe it should lead Alaska to look for a different way forward from that proposed by the Governor and adopted by the Senate last session.  Consistent with the results of the election, that way should make additional spending cuts and forego efforts to rely on PFD cuts or other taxes to recycle revenues out of the private economy to the government economy.

And the best way to achieve that, we increasingly believe, is to travel "back to the future," by looking again to Governor Hammond's original fiscal plan -- the plan that created the Permanent Fund and PFD in the first place -- as the way forward.

As outlined in Hammond's Diapering the Devil, his original plan was this:
I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were pumping,] [e]ach year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.
Alaska already has implemented the first and second parts of the plan.  The first --  "to transform oil wells pumping oil for a finite period into money wells pumping money for infinity" -- describes the Permanent Fund itself.  The second -- "[once the money wells were pumping,] [e]ach year one-half of the account’s earnings would be dispersed among Alaska residents" -- describes the PFD.

The third step in the plan -- "[once the money wells were pumping,] ... [t]he other half of the earnings could be used for essential government services" -- has never been implemented, however. 

As we have explained elsewhere, implementing the final part of the plan could provide an additional $1.2 - $1.7 billion in revenue annually over the next five years, without damaging the overall economy through PFD cuts or other taxes.  Fully implementing Governor Hammond’s 50/50 plan (or, how to find another $1.5 billion in annual revenue without PFD cuts and taxes)… (a slide deck summarizing the approach follows this column).

Combined with the use of the accumulated savings created by the unspent part of the past "other halves" and limiting overall spending to the long-term sustainable budget level, the approach also provides the means to continue to cushion Alaska through the current downturn until commodity prices -- and thus, state revenues -- start to recover.  Those who argue that state government is "running out of savings" are misleading Alaskans ...

And even if it reduces savings somewhat, the approach doesn't jeopardize the state's long-term ability to continue to pay the PFD.  Bill Walker's "Pants on Fire" claim about the PFD ...,

In short, coupled with the use of Scott Goldsmith's sustainable budget model to keep overall spending within long-term sustainable revenue levels, reverting to Governor Hammond's original plan produces a result that stabilizes the state's fiscal situation going forward without adversely affecting the state's overall economy.  See Finding Alaska's Future: FY 2018 Sustainable Budget,

In the last legislative session, some jumped quickly, too quickly we believe, to a plan that relied on making significant cuts to the PFD -- and causing significant injury to the overall Alaska economy -- in order to continue funding government.  The House Finance Committee stopped the effort and we believe, by reelecting five of the six that voted to do so, the voters expressed agreement with that decision.

But voters also appear to have sent a message that they want a fiscal plan going forward.

Returning to Governor Hammond's original fiscal plan provides a clear way forward that achieves both objectives.

That, to us, charts a way forward on fiscal issues in a manner that both best serves Alaska's overall economy and honors the outcome of the election.